Principal Issues: a) Does paragraph 146.6(15(a) apply when the estate makes a payment to a FHSA, RRSP or RRIF of the survivor from a distribution out of the FHSA of the deceased holder? b) Is it possible to designate the full amount of the deceased FHSA proceeds under paragraph 146.6(15)(a), where the estate does not have sufficient funds to make the payment, given that tax has to be withheld upon distribution to the deceased’s estate? c) If the estate distributes the amount from the FHSA of the deceased holder to the survivor, can the survivor do a tax-free transfer to his/her own FHSA, RRSP or RRIF?
Position: a) Yes, if all the conditions of paragraph 146.6(15(a) are met. b) No c) No
Reasons: a) Wording of the Act. b) The amount that can be designated jointly under paragraph 146.6(15)(a) is limited not only to the FHSA proceeds of the deceased holder distributed to the estate, but also to the payment made to the FHSA, RRSP or RRIF of the survivor. c) Paragraph 146.6(15)b), rather than paragraph 146.6(15)(a), could apply. Therefore, the amount could not be deemed to be a transfer from the deceased’s FHSA to the survivor’s FHSA, RRSP or RRIF for the purposes of subsections 146.6(7) and (8).
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 10 OCTOBER 2024
2024 APFF CONFERENCE
7. FHSA and death - indirect transfer via estate
When the holder of a FHSA dies and the surviving spouse is the beneficiary of that FHSA as a consequence of the death, a transfer can be made directly from the deceased's FHSA to the surviving spouse's FHSA (subs. 146.6(7) and 146.6(8) of the Income Tax Act (footnote 1)). It is also possible for the amounts in the deceased's FHSA to be deposited into the estate's account and for the estate to pay the amounts to the surviving spouse or directly to the surviving spouse’s FHSA, RRSP or RRIF (subs. 146.6(14) and 146.6(15)).
Where certain conditions are satisfied, the payment may be deemed to be a direct transfer from the deceased's FHSA to the surviving spouse's registered account, provided that, among other conditions, the payment is so designated jointly by the deceased's legal representative and the surviving spouse in the prescribed form filed with the CRA, Form RC724 (footnote 2) (subs. 146.6(15)).
Where the amounts are paid to the estate, the financial institution must withhold tax on the payment from the FHSA to the estate (subpara. 153(1)(v)(i)). There may therefore be a liquidity issue if the estate transfers the amount to the surviving spouse's FHSA, RRSP or RRIF, even though the transfer would be tax-free.
In addition, subsection 146.6(15) (footnote 3) provides that:
“If an amount is distributed at any time from the FHSA of a deceased holder to the holder’s legal representative and a survivor of the holder is entitled to all or a portion of the amount in full or partial satisfaction of the survivor’s rights as a person beneficially interested under the deceased’s estate, the following rules apply:
(a) if a payment is made from the estate to a FHSA, RRSP or RRIF of the survivor, the payment is deemed to be a transfer from the FHSA to the extent that it is so designated jointly by the legal representative and the survivor in prescribed form filed with the Minister;
(b) if a payment is made from the estate to the survivor, the payment is deemed for the purposes of subsection (14) to be a distribution to the survivor as a beneficiary to the extent that it is so designated jointly by the legal representative and the survivor in prescribed form filed with the Minister; and
(c) for the purposes of subsection (14), the amount distributed to the legal representative from the FHSA is deemed to be reduced by the amounts designated in paragraphs (a) and (b).”
Questions
(a) If, in the course of the winding up of the deceased holder's FHSA account, amounts are deposited into the estate's account and the estate subsequently transfers the amount directly to the surviving spouse's FHSA, RRSP or RRIF, can the CRA confirm that paragraph 146.6(15)(a) will apply to deem that indirect transfer to be a transfer from the FHSA, to the extent that it is so designated jointly by the legal representative and the surviving spouse in the prescribed form filed with the Minister?
(b) If the answer to (a) is yes, the amounts paid to the estate from the deceased holder's FHSA will be subject to withholding tax. If, as a result of that withholding, the estate does not have sufficient cash to pay the gross proceeds of the deceased holder's FHSA directly to the surviving spouse's FHSA, RRSP or RRIF, is it possible for the estate to roll over all of the gross proceeds to the FHSA, RRSP or RRIF?
(c) Reverting to Question (a), if the estate distributes the amount from the deceased holder's FHSA to the surviving spouse, can the surviving spouse make the tax-free transfer to the surviving spouse’s FHSA, RRSP or RRIF?
CRA Response
CRA Response to Question 7(a)
Section 146.6 provides, among other things, certain rules where an amount is transferred directly from a FHSA to another FHSA, RRSP or RRIF. In particular, subsections 146.6(7) and 146.6(8) allow, provided certain conditions are satisfied, a direct transfer without immediate tax consequences to a FHSA, RRSP or RRIF where the holder or annuitant, as the case may be, is the survivor (footnote 4) of the deceased holder and is entitled to the amount from the deceased holder's FHSA as a consequence of the holder's death.
Generally, where a holder of a FHSA dies, and unless subsections 146.6(7) and 146.6(8) apply, subsection 146.6(14) provides that an amount distributed to or on behalf of a beneficiary (footnote 5) under the FHSA is to be included in computing the beneficiary's income for the year. Thus, an amount paid to the estate of a deceased policyholder is generally to be included in computing the estate's income.
However, where the survivor of the deceased policyholder is entitled to all or part of the amount in full or partial satisfaction of the survivor's rights as a person beneficially interested under the policyholder's estate, paragraph 146.6(15)(a) provides certain rules that allow, under certain conditions, the deceased holder's survivor to benefit from the tax rollover provided for in subsections 146.6(7) and 146.6(8) even if the proceeds of the FHSA were first distributed to the estate.
Paragraph 146.6(15)(a) allows the deceased holder's legal representative and the survivor to jointly designate, in the prescribed form filed with the Minister, payments made by the estate to a FHSA, RRSP or RRIF of the survivor to be deemed to have been transferred to the beneficiary's FHSA, RRSP or RRIF directly from the deceased holder's FHSA. In such a case, the amount so deemed to have been transferred directly could be transferred without any immediate tax consequences, provided the conditions of subsection 146.6(7) are satisfied. Whether those conditions are met in a specific situation is a question of fact.
In order to be eligible for a joint designation, amounts must be distributed from the FHSA to the estate before the deceased holder's FHSA ceases to be a FHSA, generally before the end of the year following the year of the holder's death, unless the FHSA ceased to be a FHSA at an earlier date under subsection 146.6(16). According to the instructions on the prescribed form, Form RC724, it must be completed within 60 days of the date on which the payment is made by the deceased holder's estate to the survivor's FHSA, RRSP or RRIF.
CRA Response to Question 7(b)
An amount distributed from the deceased holder's FHSA to the deceased holder's estate is generally required to be included in computing the income of the estate receiving it under subsection 146.6(14) and, in such circumstances, withholding tax is applicable under paragraph 153(1)(v).
Payments made by the estate to the survivor's FHSA, RRSP or RRIF may, however, be deemed by paragraph 146.6(15)(a) to have been transferred to the survivor's FHSA, RRSP or RRIF, as the case may be, directly from the deceased holder's FHSA, if all conditions are satisfied. The amount that can be designated jointly under paragraph 146.6(15)(a) is limited not only to the proceeds of the deceased holder's FHSA that are distributed to the estate, but also to the amount of the payment made to the surviving spouse's FHSA, RRSP or RRIF account. Therefore, to the extent that the estate does not have sufficient assets to make a payment equal to the gross proceeds of the deceased holder's FHSA to a FHSA, RRSP or RRIF of the surviving spouse, the amount of the joint designation cannot exceed the amount of the payment actually made.
CRA Response to Question 7(c)
In the situation described, once the estate has paid the amount to the deceased holder’s survivor, paragraph 146.6(15)(b) (and not paragraph 146.6(15)(a)) could apply to the distribution. Thus, in the situation described, the amount paid by the estate to the survivor would be included in computing the survivor's income by virtue of subsection 146.6(14), to the extent that it is the subject of a joint designation to that effect in the prescribed form, Form RC724. However, it cannot be deemed to be a direct transfer from the deceased holder's FHSA to the survivor's FHSA, RRSP or RRIF for the purposes of the rules in subsections 146.6(7) and 146.6(8).
Isabelle Brulotte, CPA
October 10, 2024
2024-102421
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 R.S.C. 1985, c. 1 (5th Supp.) (the “Act”).
2 CANADA REVENUE AGENCY, Form RC724 “Joint Designation for a Deemed Transfer or Distribution from an FHSA after the Death of the Holder”
3 As amended by subsection 46(10) of the Fall 2023 Economic Statement Implementation Act, S.C. 2024, c. 15 and without taking into account the Legislative Proposals relating to the Income Tax Act and the Income Tax Regulations released by the Department of Finance on August 12, 2024.
4 Within the meaning of subsection 146.6(1), an individual who, immediately before the death of the holder, was the holder's spouse or common-law partner.
5 Which, according to the definition of this expression in subsection 146.6(1), includes the estate of the deceased holder.